Negative sentiment continues to fuel a spike in market volatility amid a fluid situation surrounding the Russia-Ukraine war. This continues to command center stage; however, Thursday’s release of consumer prices will figure prominently into next week’s FOMC meeting. Key themes for the week:
- The Federal Reserve’s (Fed) path to rate liftoff remains in focus after Chair Powell testified to Congress last week that he expects a rate hike at next week’s meeting. Concerns about modest Fed tightening have been overshadowed by the Russia-Ukraine war. The war poses a greater near-term catalyst for tightening financial conditions than Fed policy. Economic effects from the war, sanctions, and the duration of the conflict are impacting the European recovery, which could find itself at the epicenter of global inflation as well.
- An extended conflict substantially raises the risk of widening the geographic scope of an economic slowdown and potentially making it deeper in magnitude.
- Inflationary forces could get exacerbated if sanctions target Russia’s natural resources in addition to limitations on Ukraine’s rich resources of wheat, corn and iron.
- Risks of cyberattacks from Russia have also risen with key targets suspected to be government offices, financial systems, or power grids. That said, the U.S. is deemed more secure than some of our European allies.
- Any truce would be welcomed by markets with suspicious optimism seeking confirmation.
Our base case continues to anticipate downgrades in global economic growth with recession risks marginally higher abroad. Our view is the U.S. remains the best seat in the house.
A look back
- Global equity markets finished the week lower with broad-based declines. U.S. stocks topped their global peers, while international developed markets equities were dragged lower by shares in Europe.
- The U.S. yield curve flattened further last week as fixed income markets began to price in an economic slowdown with persistent inflation and a growing global impact from the war.
- Fed Chair Powell testified to both houses of Congress last week, affirming expectations for a modest rate hike at next week’s FOMC meeting.
A look ahead
- Top of mind this week is whether or not the U.S. and parts of Europe will extend sanctions by placing a ban on the import of Russian oil.
- Tightening financial conditions from the economic effects of the Russia-Ukraine war could overshadow next week’s Fed meeting and its anticipated 0.25% rate hike.
- Economic releases: NFIB Small Business Optimism, Trade Balance, Wholesale Inventories, Consumer Price Index, University of Michigan Sentiment, MBA Mortgage Applications.
To read the publication in its entirety, please click the button below "Download PDF".